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Microeconomic Theory

Notes Criticisms of Profit Maximization Theory

Economists have strictly criticized to profit maximization theory through following points—
1. Profits Uncertain: It is thought that in profit maximization, firms are totally certain, but profit is not
same anymore, because it is obtained by income and future cost, so it makes impossible to maximize
the profit in such a type of uncertainty.
2. No Relevance to Internal Organization: Firm is not directly interconnected with internal organization.
For example, some management destroy so much money that if the destroyed money is saved so
wealth of firm and profit can be maximized. The management is responsible for growing total
property and sells. Apart from this, the management tries to make lower cost and grow the efficiency
through a program. The management work is real fact rather than more capital of stockbroker.
3. No Perfect Knowledge: The theory of profit maximization is based upon full knowledge of cast
and arrival of own firm as well as another firms. But the fact is, firms do not have full knowledge in
which they work. Actually, they have knowledge about their product and cost, but they cannot be
sure for the demand curve of market. They always work in uncertain condition and by this way it
becomes so weak profit maximization theory because it is considered that firm is sure for everything.
4. Empirical Evidence Vague: Empirical Evidence Vague is not clear on experiential level. Many firms
don’t agree regarding profit as a main aim. The work technique is so complex of latest firms, so they
do not think only the profit maximization. Their main problems are controlling and administration.
The administration’s work of firms is not done by producer; it is done by managers and shareholders.
They are more interested in their salaries and profit commission. Because high-tech firms are totally
separate from power of controlling, so their mode of work is not oriented to profit maximization.
5. Firms do not Know About MC and MR: The fact is that the firms are not worried for calculation of
maximum cost and marginal arrival in commercial field. Most of them are not familiar with these
words. Many of them do not know about the demand and arrival curve. And some do not know
about their basic cost structure. The experimental proof of Hall and Hitch showed that firm has
no knowledge of marginal cost and marginal arrival. Although they are not greedy machine for
assumption. As C.J. Hawkins said, “To give the logic that the purpose for all the firms is only profit
maximization is not logical, and this is as similar logic than every student wants to get maximum
marks in examination by hook or crook.”

Self Assessment

Multiple choice questions:
4. In short-term and long-term, the firm does ........................ his profit.
(a) maximization (b) minimization (c) normalization (d) none of the these
5. Under perfect competition, firm wants to become ........................ among other products.
(a) excellent (b) first (c) last (d) none of the these
6. Most of the firms do not consider profit as ....................... .
(a) a main purpose (b) main product (c) main firm (d) none of the these
6. Principle of Average Cost Maximizes Profits: Hall and Hitch concluded that firms do not apply the
principle of equilibrium in MC and MR to maximize short-term profit. But their aim is to maximize
the profit in long-term. They fix the price on average cost theory, not on marginal theory. According
to the principle, price = AVC + AFC + profit margin (which is generally 10%). Thus, the main purpose
of profit maximization is to fix the price on the basis of the principle of average cost, and then sell
the production on same price.
7. Static Theory: New classical theory of the firm is static by nature. This does not tell about the
duration of short-term or long-term. The time period of neo-classical firm is equal and independent
periods. Decisions are taken freely. This is the big lack of theory of profit maximization. In reality
the decisions are ‘mutually dependent and time bound.’ This means, a decision is affected from the

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